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10 Things You Should Know About Aurora Cannabis

Here's everything you need to know about the second-largest pot stock by market cap.

No, your eyes aren't deceiving you; the marijuana industry simply can't be slowed at the moment. According to newly published estimates from ArcView Market Research in partnership with BDS Analytics, North American legal weed sales are expected to grow by an average of 28% per year between 2018 and 2021. If true, we could be talking about almost $25 billion in annual sales just a few years from now.

There has also been a noticeable change in the way the public views pot, at least in the United States. In 1995, national pollster Gallup found that a mere 25% of respondents favored nationally legalizing the drug. However, by this past October, favorability had soared to 64%. Not surprisingly, we've seen 29 states legalize cannabis in some capacity since 1995.

Image source: Getty Images.

Of course, it's not the U.S. but Canada that's become the blueprint for success in pot progressivism. A firm Schedule I classification for weed in the U.S. all but ensures the inability for U.S.-based pot stocks to thrive. Meanwhile, Canada legalized medicinal marijuana back in 2001 and looks to be on the verge of legalizing recreational cannabis by this summer. A green light for adult-use weed could mean $5 billion or more in added annual sales for the Canadian pot industry.

Everything you need to know about Aurora Cannabis

Perhaps no company has created more buzz in the Canadian marijuana industry in recent months than Aurora Cannabis(NYSE:ACB). As the second-largest pot stock, it's given Canopy Growth Corp.(NYSE:CGC) a run for its money. It's also returned just shy of 1,750% for investors over the trailing two-year period through March 5, 2018. If you've considered putting your money to work in Aurora Cannabis' stock, here are 10 things you should first know.

1. It has ramped up faster than its peers

To begin with, Aurora Cannabis has managed to grow its existing production at a quicker pace than its peers. Even though there's something of a race to construct as many greenhouses as possible in anticipation of legalization this summer, Aurora took just five quarters to go from no sales per quarter to 650 kilograms of cannabis sold per quarter. Meanwhile, it's taken Canopy Growth and Aphria(OTC:APHQF) a respective nine quarters and 13 quarters to reach 650 kilograms in licensed sales.

Image source: Getty Images.

2. It'll likely be a top-tier producer

Aurora Cannabis looks to have solidified itself, for the moment, as a top-three producer in terms of annual capacity. During the company's second-quarter operating results, Aurora called for between 240,000 kilograms and 270,000 kilograms in annual production. This will come from its flagship Aurora Sky facility, which should yield more than 100,000 kilograms of cannabis a year (when completed in mid-2018), as well as its partnership with Alfred Pedersen & Son in Denmark. Known as Aurora Nordic, the largest grow facility in Europe should yield at least 120,000 kilograms per year.

Its only close rivals appear to be Aphria, which has guided to approximately 230,000 kilograms of annual production, and Canopy Growth, which hasn't offered guidance, but has 665,000 square feet of capacity already and is constructing or developing 3.4 million square feet of greenhouses right now.

3. It's completing the largest marijuana acquisition in history

Aurora Cannabis is also in the midst of completing what will be the largest marijuana acquisition of all time -- an $852 million buyout of Saskatchewan-based CanniMed Therapeutics. Though the initial talks between both boards were hostile, CanniMed came around after Aurora offered a huge premium over where it had been trading in mid-November. The deal will bring 20,000 new medical patients under Aurora's wing, as well as boost its fully-funded capacity by 19,000 kilograms per year.

4. Partnerships are pivotal for its horizontal and vertical expansion

Aside from its monstrous acquisition, Aurora Cannabis hasn't been shy about forming strategic relationships and partnerships to broaden its product line or assist in the distribution of its product. For example, it's tied up with Namaste Technologies, a developer and retailer of vaporizers for the cannabis market, as well as the owner of telemedicine platform NamasteMD. Under an agreement signed in January, Namaste will provide CanvasRX, which is wholly owned by Aurora, with a customized version of Namaste's patient acquisition tool, NamasteMD.

Image source: Getty Images.

5. International markets are important

Though the Canadian market takes precedence, Aurora Cannabis has been shoring up its reach in foreign markets as well. Its acquisition of Pedanios in May 2017 gave the company a means to distribute to pharmacies throughout Germany. Meanwhile, it also has a footprint in Italy, Australia, and Denmark (the latter of which is through the Aurora Nordic facility). Being among the first growers in these countries should hopefully give it first-to-market advantages that yield long-term pharmacy supply agreements.

6. Its investments have yielded huge returns

A little-known fact about Aurora Cannabis is that its strategic investments have yielded massive returns. In a January 2018 presentation, the company announced that its investments in Cann Group, Radient Technologies, and Hempco Food and Fiber had yielded a return on investment of 330%! The value of these investments in January was about $134 million, giving the company an adequate backup source of capital if needed.

7. It's well capitalized

Investors should understand that Aurora Cannabis has a whole lot of cash at its disposal. It ended its fiscal second quarter with $279 million in cash and cash equivalents; however, this didn't count two huge cash proceeds that followed the end of the quarter. It netted $159 million in gross proceeds from the sale of convertible debentures on Jan. 11, then received $91 million more in gross proceeds on Feb. 7 from the exercise of warrants and stock options. In total, Aurora may have over $500 million in cash and cash equivalents.

Image source: Getty Images.

8. Bought-deal offerings are its primary source of capital

Unfortunately, the company's only real means to generate capital to expand its operations and fund its acquisitions at the moment is through bought-deal offerings. A bought-deal offering involves the sale of common stock, debentures, warrants, and/or options to an institution or investor prior to the release of a prospectus. Though Aurora hasn't had any trouble raising capital, its outstanding share count has ballooned by more than 2,900% since the end of fiscal 2014 to 489.9 million shares. A rising share count dilutes existing shareholders, as well as weighs down earnings per share.

9. Oversupply is a real concern

Another concern shareholders should be aware of is the potential oversupply of dried cannabis. An online report from Grizzle estimates that Canadian market demand will total around 800,000 kilograms per year. However, by 2021, the market could be oversupplied by at least 85%! It's possible that international medical cannabis markets could take some of this production off the hands of Canadian producers, but it's not clear if there will be enough demand to meet the projected supply. If such a scenario plays out, the average selling price per gram could plummet.

10. Cash costs per gram should continue to decline

Finally, and to counter the previous point, Aurora Cannabis is expecting its hard work in developing the highly automated Aurora Sky and Aurora Nordic facilities to translate into substantially lower dried cannabis growing costs on a per-gram basis. The company's January presentation intimates that growing costs should fall below CA$1 per gram ($0.77), which would be particularly important if Canada does encounter an oversupply problem.

Now that you know the pertinent facts, you can determine whether or not Aurora Cannabis is right for your portfolio.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong